Economic Order Quantity (EOQ): Formula, Example and When to Use It

Economic order quantity (EOQ) estimates the order quantity that minimizes the combined cost of placing orders and holding inventory under a simplified set of assumptions.

The classic formula is:

EOQ = √((2 × Annual Demand × Ordering Cost) ÷ Annual Holding Cost per Unit)

What is economic order quantity?

EOQ answers a different question from a reorder point. A reorder point asks when should we order? EOQ asks how much should we order?

The model balances two costs that move in opposite directions:

• Larger, less frequent orders reduce ordering cost.
• Larger orders increase average inventory and holding cost.

EOQ identifies the theoretical quantity where those relevant costs are minimized.

The EOQ formula

EOQ = √((2DS) ÷ H)

Where:

• D = annual demand in units
• S = fixed cost to place one order
• H = annual holding cost per unit

EOQ example

Assume a retailer has:

• Annual demand: 12,000 units
• Cost to place one order: $40
• Annual holding cost per unit: $3

EOQ = √((2 × 12,000 × 40) ÷ 3)

EOQ = √320,000 ≈ 566 units

Under the assumptions of the model, an order quantity of roughly 566 units minimizes the combined ordering and holding costs represented in the calculation.

How to estimate ordering cost

Ordering cost should represent costs that occur because an order is placed. Depending on the business, that may include purchasing administration, approval time, receiving setup, supplier transaction costs, or other fixed effort per order.

Do not include the product purchase price itself as the fixed ordering cost.

How to estimate holding cost

Holding cost can include capital, storage, insurance, handling, shrinkage, and obsolescence depending on the business's costing method. See the full inventory carrying cost guide.

If carrying cost is expressed as a percentage of unit cost, a simplified annual holding cost per unit is:

Holding Cost per Unit = Unit Cost × Carrying Cost Percentage

EOQ assumptions

The classic model is intentionally simple. It generally assumes relatively stable and known demand, a fixed ordering cost, a fixed holding cost, replenishment without shortages, and reasonably predictable lead time.

Real inventory rarely behaves perfectly, which is why EOQ should be treated as a decision aid rather than an unquestionable order quantity.

When EOQ works well

• Demand is reasonably stable
• The product is replenished repeatedly
• Ordering cost can be estimated
• Holding cost is meaningful
• Supplier minimums and case packs do not dominate the decision
• The product is not highly perishable or trend-driven

When EOQ is less useful

EOQ can be misleading for highly seasonal products, rapidly growing or declining items, perishables, products with large supplier discounts, intermittent demand, or businesses where supplier constraints determine the practical order size.

In those cases, use forecast demand, shelf life, minimum order quantities, and cash constraints alongside any EOQ calculation.

EOQ vs. reorder point

The two can be used together:

• Reorder point: triggers the order.
• EOQ: suggests an order quantity.

For example, an item may have a reorder point of 300 units and an EOQ of 550 units. Reaching 300 tells the business when to act; 550 is the model's suggested purchase quantity.

EOQ vs. min-max inventory

Min-max inventory replenishes toward a target maximum after stock reaches a minimum threshold. EOQ derives a cost-based order quantity instead of using a fixed order-up-to level.

How EOQ connects to inventory turnover

Ordering too much can increase average inventory and reduce inventory turnover. Ordering too little can increase administrative effort and stockout exposure. EOQ provides one framework for balancing those pressures when its assumptions are reasonable.

Common EOQ mistakes

• Using purchase price as the ordering cost
• Ignoring minimum order quantities and case packs
• Using annual demand from an abnormal year
• Applying EOQ to seasonal or declining products without adjustment
• Treating the result as exact rather than approximate
• Forgetting that reorder timing is a separate decision

How Stash fits

Stash connects inventory, demand, suppliers, purchasing, and locations. EOQ can be one input into purchasing, while real operating decisions also need current stock, incoming orders, forecasts, lead times, and supplier constraints.

Frequently asked questions

What does EOQ stand for?

Economic order quantity.

Does EOQ include safety stock?

The classic EOQ formula does not calculate safety stock. Safety stock is a separate buffer for uncertainty and can be incorporated into the broader replenishment policy.

Does EOQ tell you when to reorder?

No. EOQ estimates order quantity. A reorder point or review schedule determines when replenishment should be triggered.